Relief rally peters out

A relief rally on confirmation of the Lloyds TSB merger with HBOS and news that central banks were pumping an extra $180m into the financial system did not last the day.

After climbing as high as 5015.9, the FTSE 100 ended down 32.4 points at 4880.0. The leading index has now lost 10% of its value so far this week.

Lloyds shares slumped 42.25p to 237.5p, a 15% decline, on concerns about whether the deal would succeed and if it did, what it would do to Lloyds' finances. The bank's fall accounted for around 10 points of the FTSE 100 decline.

Nic Clarke at Charles Stanley summed it up: "By combining with HBOS, Lloyds TSB has markedly increased the risk of holding its shares. Not only has Lloyds TSB tripled its exposure to UK mortgages in a period when the UK economy is about to go into recession but more importantly in the short term it has significantly increased Lloyds TSB exposure to potential short term funding problems as HBOS's loan to asset ratio is markedly higher and it has significant funding requirements in the near term. This was precisely why the short sellers had targeted HBOS for such harsh treatment [this week]."

At the Lloyds' closing price, the deal is worth 197p a share. HBOS closed up 25.5p at 172.6p.

Sentiment in the financial sector was not helped by the growing uncertainty surrounding US investment bank Morgan Stanley, which was said to be in merger talks with regional banking group Wachovia and others including China's CIC to safeguard its future. It shares lost another 15% in early trading. After a 200 point rebound when Wall Street opened, the Dow Jones Industrial Average soon lost its impetus and was up only 60 points by the time London closed.

Among other UK banks, Bradford & Bingley dropped 4p to 25p. The mortgage bank was downgraded by ratings agency Moody's yesterday. Barclays fell 16.75p to 301p as it raised £701m in a placing at 310p a share, below its earlier hopes of £750m. The cash will help pay for Barclay's acquisition of some of the assets of the collapsed Lehman Brothers, but Citigroup analysts were unimpressed by the deal and repeated their sell recommendation. Royal Bank of Scotland slipped 7.6p to 161.8p on reports from the US that its exposure to the Lehman amounted to $1.5bn-$1.8bn.

Insurer Old Mutual, which earlier this week said it had $55.7m worth of exposure to Lehman, fell 12.75p to 69p as it revealed today the figure for AIG was $237m.

Miners had a mixed day despite the gold price continuing to attract investors for its safe haven status. Randgold Resources, which has deposits in Mali and Ghana, jumped 256p to £21.94, while Anglo American added 67p to £21.16 on renewed talk of a possible bid from Brazil's Vale.

But iron ore specialist Ferrexpo fell 4.2p to 164p after the billionaire behind the business cashed in some shares. Kostyantin Zhevago has sold 21.3m shares at 167p each, raising £35m and leaving him with 71.49%. A spokesman said the shares were acquired by the company as part of its buy-back programme.

Heading in the right direction was B&Q owner Kingfisher, up 11.6p to 131.4p after well received half year results. The London Stock Exchange recovered 57.5p to 790p on hopes that the competitive threat from Turquoise - the rival trading platform set up by a number of now struggling investment banks including Merrill Lynch - had been overdone.

Enterprise Inns closed 11p better at 213.25p as Goldman Sachs removed the pub group from its conviction sell list. The bank said: "ollowing recent share price weakness we no longer see the risk/reward profile of Enterprise as materially skewed to the downside."

Finally Heritage Oil added 36p to 240p as it revealed it was in preliminary talks about a possible disposal of some of its assets. This could lead to an offer for the whole company. Traders said Tullow Oil, up 22p to 717p, could be interested in Heritage's Russian assets, but there were other businesses which could be looking at the whole company.